ACP 314

FIRST EXAM REVIEWER

1. What is the primary objective of assurance engagements under the Philippine Framework?
A. Provide absolute certainty
B. Reduce risks to zero
C. Enhance the credibility of information
D. Guarantee financial success

2. Which of the following is a key element of an assurance engagement process?

A. Assuring 100% accuracy
B. Obtaining sufficient and appropriate evidence
C. Relying solely on management's representation
D. Ignoring potential risks

3. Who is responsible for the preparation and presentation of the subject matter information in an
assurance engagement?
A. Assurance provider
B. External stakeholders
C. Management or those charged with governance
D. Regulatory authorities

4. What is the primary purpose of the practitioner's report in an assurance engagement?

A. To criticize the client's practices
B. To provide legal advice
C. To communicate the findings and conclusions of the assurance engagement
D. To promote the client's products

5. Who can be the intended users of an assurance report in the Philippines?

A. Only external auditors
B. Only regulatory authorities
C. Any users or their representatives as identified in the engagement agreement
D. Only members of the assurance provider's firm

6. Which of the following is considered least likely an objective of Philippine Framework for Assurance
Engagement?
A. The standard serves as a framework for the development by the AASC of specific standards for
particular type of assurance engagement.
B. To define specific rules on issuing report that contains either a high or moderate level of
assurance.
C. To establish standards for and provide guidance to professional accountants in public practice for
the performance of engagement intended to provide a high level of assurance.
D. To describe the objectives and elements of assurance engagements intended to provide either a
high or moderate levels of assurance.

7. Which of the following is least likely an objective of an assurance engagement?

A. The engagement is intended to prevent the issuance of materially misleading information.
B. The engagement is intended to enhance the credibility of information about a subject matter.
C. An assurance engagement is intended for a professional accountant to express a conclusion that
provides the intended users with a level of assurance about the subject matter.
D. The engagement is intended to provide a level of assurance to be issued by a professional
accountant about the information of being in conformity, in all material respects, with suitable criteria.

8. Which of the following least likely limits the auditors ability to detect material misstatement?
A. Most audit evidences are conclusive rather then being persuasive.
B. The inherent limitations of any accounting and internal control system.
C. Audit is based on testing.
D. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting
intentional misstatements.

9. The market for auditing services is driven by

A. The regulatory authority of the Securities and Exchange Commission.
B. A demand by external users of financial statements.
C. Pronouncements issued by the Auditing and Assurance Standard Council.
D. Congress at the national level.

10. As used in auditing, which of the following statements best describes “assertions”?
A. Assertions are the representations of management as to the reliability of the information system.
B. Assertions are the auditor’s findings to be communicated in the audit report.
C. Assertions are the representations of management as to the fairness of the financial
statements.
D. Assertions are found only in the footnotes to the financial statements.

11. What is the purpose of the Preface to International Assurance Standards (Preface)?
A. To provide detailed assurance procedures
B. To outline the structure and authority of International Assurance Standards
C. To set financial reporting standards
D. To regulate tax policies

12. Which organization is responsible for issuing the International Assurance Standards?
A. World Bank
B. International Federation of Accountants (IFAC)
C. United Nations
D. International Monetary Fund (IMF)

13. What is the role of the International Auditing and Assurance Standards Board (IAASB) in the context
of International Assurance Standards?
A. Enforcing the standards in individual countries
B. Developing and issuing International Assurance Standards
C. Providing financial assistance to countries adopting the standards
D. Offering training programs for auditors

14. According to the Preface, what is the purpose of assurance engagements?

A. To guarantee financial success
B. To express an opinion on the truth of financial statements
C. To enhance the credibility of information
D. To minimize tax liabilities

15. In the Preface, what is the term used for the ethical requirements applicable to assurance
engagements?
A. Code of Conduct
B. International Ethics Standards
C. International Standards on Auditing
D. International Code of Ethics

16. What is the mission of the International Federation of Accountants (IFAC)?

A. the worldwide development and enhancement of an accountancy profession with harmonized
standards
B. the facilitation of audit engagements worldwide
C. the promotion of local laws and regulations
D. the issuance of international auditing standards 3

17. Who establishes and issues high-quality standards on auditing, assurance, and related services?
A. the public members of the IAASB
B. the Nominating Committee
C. the IAASB
D. the IFAC Board

18. In accordance with the IAASB's Standards, which engagements do not override the local laws or
regulations?
A. consulting engagements on financial projections
B. audit of historical financial statements or assurance engagements on other information in a
particular country
C. audit of international financial statements
D. assurance engagements on current financial statements
19. When will a professional accountant comply with the IAASB's Engagement Standards?
A. when the professional accountant has complied fully with all relevant standards
B. when the professional accountant has reviewed the relevant standards briefly
C. when the professional accountant has completed training in the standards
D. when the professional accountant deems the standards applicable

20. How many members are there on the IAASB?

A. five
B. ten
C. three
D. eighteen

21. Which of the following is a limitation of audit engagements?

A. Absolute assurance is provided
B. Limited reliance on internal controls
C. Audit reports guarantee financial success
D. Auditors are responsible for preparing financial statements

22. Which of the following statements about the limitations of audit is true?
A. Auditors are responsible for management decisions
B. Auditors do not assess the organization's ability to continue as a going concern
C. Auditors provide absolute assurance about the accuracy of financial statements
D. Audit procedures may not detect all material misstatements

23. Which of the following statements best describes an audit engagement?

A. Provides a high level of assurance
B. Provides moderate assurance
C. Provides no assurance
D. Involves preparing financial statements

24. What distinguishes an audit from a review engagement?

A. The level of assurance provided
B. The length of the engagement
C. The complexity of the financial statements
D. The number of audit team members

25. What is a key difference between a review and a compilation engagement?

A. Reviews provide absolute assurance, while compilations provide limited assurance
B. Reviews involve providing assurance, while compilations involve only presenting financial
information without assurance
C. Compilations involve detailed testing of transactions and balances, while reviews do not
D. Reviews and compilations are identical in nature and procedures

26. In all cases, audit reports must

A. Be signed by the individual who performed the audit procedures.
B. Certify the accuracy of the quantitative information which was audited.
C. Communicate the auditor’s finding to the general public.
D. Inform readers of the degree of correspondence between the quantifiable information and the
established criteria.

27. The primary objective of the ordinary examination of financial statements by a CPA is the expression
of an opinion on
A. The competence of management in accounting matters which is implied by whether the opinion is
qualified or not
B. The conformity of the statements with the books of account
C. The conformity of the financial statements with GAAS applied on a basis consistent with that of the
preceding year.
D. The fairness with which the financial statements present the financial position and results of
operations.
28. The independent auditor lends credibility to client’s financial statements by
A. Stating in the auditor’s management letter that the examination was made in accordance with GAAS.
B. Maintaining a clear-cut distinction between management’s representations and the auditor’s
representations.
C. Attaching an auditor’s opinion to the client financial statements.
D. Testifying under oath about client’s financial information.

29. A CPA certificates is evidence of

A. Recognition of independence
B. Basic competence at the time the certificate is granted.
C. Culmination of the educational process.
D. Membership in the PICPA

30. The primary responsibility for the adequacy of disclosure in the financial statements and
accompanying notes rests with the
A. Audit partner assigned to the engagement.
B. Senior auditor in charge of fieldwork.
C. Staff auditor who drafts the statements and notes.
D. Client management.

31. ISQM 1 primarily focuses on:

A. Audit procedures
B. Quality management for firms performing assurance engagements
C. Financial reporting standards
D. Taxation regulations

32. Under ISQM 1, what should the firm's system of quality management include?
A. Only procedures related to financial reporting
B. Leadership responsibilities for quality management, relevant ethical requirements,
acceptance and continuance of client relationships, engagement performance, and monitoring
C. Strict guidelines for client communication
D. Procedures for internal employee disputes

33. What does ISQM 1 require firms to do in response to deficiencies identified during the monitoring
process?
A. Ignore the deficiencies if they are minor
B. Address deficiencies and take appropriate actions to achieve improvements in the firm's
system of quality management
C. Cease all audit engagements immediately
D. Report the deficiencies to clients

34. Under ISQM 1, who is responsible for establishing and maintaining a system of quality management
for the firm?
A. Clients
B. Regulatory authorities
C. Firm leadership
D. External auditors

35. What is the objective of ISQM 1?

A. To establish ethical guidelines for auditors
B. To provide detailed audit procedures for various industries
C. To enhance the quality of engagements and provide a basis for achieving consistent, high-
quality audit and assurance services
D. To standardize financial reporting formats

36. When a new auditor intends to communicate with the predecessor auditor, what is the primary
objective?
A. To criticize the predecessor auditor's work
B. To establish a professional relationship
C. To obtain information relevant to the client's acceptance or continuance as an audit client
D. To question the predecessor auditor's competence
37. In the context of communication with the predecessor auditor, what does the term "client's consent"
refer to?
A. Permission from the regulatory authorities
B. Permission from the audit firm's partners
C. Permission from the client to contact the predecessor auditor
D. Permission from the audit committee

38. In cases where the client does not give consent to contact the predecessor auditor, what should the
new auditor do?
A. Proceed with the engagement without seeking additional information
B. Assume that the client is hiding something and terminate the engagement
C. Request the client's consent again, explaining the importance of the communication with the
predecessor auditor
D. Terminate the engagement immediately

39. Who typically conducts the engagement quality review within an audit firm?
A. Audit interns
B. Senior management
C. An individual who was not a member of the engagement team
D. External consultants

40. When should an engagement quality review be performed in the audit process?
A. At the beginning of the audit engagement
B. During the planning phase of the audit engagement
C. After the completion of fieldwork and before the issuance of the auditor's report
D. After the issuance of the auditor's report
ACP314
SECOND EXAM REVIEWER

1. Before the completion of the audit engagement, an auditor is requested to change the engagement
to one that provides a lower level of assurance. If the auditor concludes that there is a reasonable
justification for the change in engagement, the report to be issued would
A. Be that appropriate for the revised terms of engagement
B. Include reference to the original engagement.
C. Include reference to any procedures that may have been performed in the original engagement.
D. Not include reference to any procedures that may have been performed, unless when the new
engagement is to undertake agreed-upon procedures.

2. If the auditor is unable to agree to change of engagement and is not permitted to continue the original
engagement, the auditor should
A. insist on continuing the original engagement
B. Express a qualified opinion
C. Express an adverse opinion
D. withdraw from the engagement

3. S1 – If the auditors conclude that there is reasonable justification to change the engagement, and
the report issued would be that appropriate for the revised engagement then the report would include
reference to original engagement to avoid confusion;
S2 - To avoid confusion regarding on the report on acceptance to change in engagement, the auditor
will not referred any procedures that may have been performed in the original engagement except on
a review engagement and thus procedures performed is a normal part of the report.
A.S1 is false, S2 is true
B.S1 is true, S2 is false
C. Both statement are true
D. Both statement are false

4. The auditor of a parent entity is also the auditor of its component. Which of the following factors may
influence the auditor’s decision whether to send a separate engagement letter to the entity’s
component?
A. Whether a separate auditor’s report is to be issued on the component.
B. The component’s management does not accept its responsibilities that are fundamental to the
conduct of an audit.
C. The financial reporting framework used by the component is unacceptable.
D. The preconditions for an audit of the component’s financial statements are not present.

5. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should
A. Withdraw from the engagement.
B. Insist on continuing the original engagement.
C. Express a qualified opinion.
D. Express an adverse opinion.

6. In an audit based on Philippine Standards on Auditing (PSAs), a successor auditor would normally
become satisfied with opening balances by
A. Performing analytic review procedures.
B. Reviewing the predecessor’s working papers.
C. Auditing the previous year’s working papers.
D. Interviewing client personnel.

7. In order to establish whether the preconditions for an audit are present, the auditor shall
A. Determine whether the financial reporting framework to be applied in the preparation of the financial
statements is practicable.
B. Obtain the agreement of management that it acknowledges and understands its responsibility for the
preparation of the financial statements in accordance with the GAAP.
C. To provide the auditor with access to all information of which management is aware that is
relevant to the preparation of the financial statements such as records, documentation and
other matters.
D. To provide the auditor with unrestricted access to records and documents within the entity from where
the auditor determines it necessary.
8. The following are usually included in an auditor’s engagement letter, except
A. List of audit procedures to be used in inventory observation.
B. The financial statements are the responsibility of the company’s management.
C. A reference to PFRS.
D. A reference to PSAs.

9. An audit plan is a
A. Detailed plan of analytical procedures and all substantive tests to be performed in the course of the
audit.
B. Document that provides an overview of the company and a general plan for the audit work to
be accomplished, timing of the work, and other matters of concern to the audit.
C. Generic document that auditing firms have developed to lead the process of the audit through a
systematic and logical process.
D. Budget of the time that should be necessary to complete each phase of the audit procedures.

10. An audit program provides proof that

A. Sufficient competent evidential matter was obtained.
B. The work was adequately planned.
C. There was compliance with GAAS of reporting.
D. There was a proper study and evaluation of internal control.

11. Audit risk components consist of inherent, control and detection risks. Which of the them is (are) the
dependent variable(s)?
A. Inherent risk
B. Control risk
C. Detection risk
D. Inherent and control risks

12. In planning an audit, the auditor’s knowledge about the design of relevant controls should be used
to
A. Identify the types of potential misstatements that could occur.
B. Assess the operational efficiency of internal control.
C. Determine whether controls have been circumvented by collusion.
D. Document the assessed level of control risk.

13. An auditor is planning an audit engagement for a new client in a business, unfamiliar to the auditor.
Which is the least useful source of information for the auditor during the preliminary planning state,
when the auditor is trying to obtain a general understanding of audit problems that might be
encountered?
A. Textbooks and periodicals related to the industry.
B. Industry Audit and Accounting Guides
C. Financial statements of other entities in the industry.
D. Results of performing substantive tests.

14. An auditor is required to establish an understanding with a client regarding the services to be
performed for each engagement. This understanding generally includes
A. Management’s responsibility for errors and the illegal activities of employees that may case material
misstatement.
B. The auditor’s responsibility for ensuring that the audit committee is aware of any significant
deficiencies in internal control that come to the auditor’s attention.
C. Management’s responsibility for providing the auditor with an assessment of the risk of material
misstatement due to fraud.
D. The auditor’s responsibility for determining preliminary judgments about materiality and audit risk
factors.

15. An auditor may achieve audit objectives related to particular assertions by

A. Performing analytical procedures.
B. Adhering to a system of quality control.
C. Preparing auditor working papers.
D. Increasing the level of detection risk.
16. An auditor obtains knowledge about new client's business and its industry to
A. Make constructive suggestions concerning improvements to the client's internal control.
B. Develop an attitude of professional skepticism concerning management's financial statement
assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements takes as
a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client's financial
statements.

17. If the auditor sets the preliminary judgment about materiality level at a relatively low peso amount,
A. More evidence will be required than for a high level.
B. Less evidence will be required than for a high level.
C. The same amount of evidence will be required as for a high level.
D. The amount of evidence required will not be affected.

18. The concept of materiality will be least important to the CPA in determining the
A. Scope of his audit of specific accounts.
B. Specific transactions that should be reviewed
C. Effects of audit exceptions upon his opinion.
D. Effects of his direct financial interest in a client upon his independence.

19. The concept of materiality will be least important to the CPA in determining the
A. Scope of his audit of specific accounts.
B. Effects of audit exceptions upon his opinion.
C. Specific transactions that should be reviewed
D. Effects of his direct financial interest in a client upon his independence.

20. The concepts of audit risk and materiality are interrelated and must be considered together by the
auditor. Which of the following is true?
A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the
financial statements are fairly stated.
B. The phrase in auditor’s standard report “present fairly, in all materials respects, in conformity
with generally accepted accounting principles” indicates the auditor’s belief that the financial
statements taken as a whole are not materially misstated.
C. Misstatements are not important individually but are important in the aggregate, the concept of
materiality does not apply.
D. Material fraud but not material errors cause financial statements to be materially misstated.

21. The concepts of audit risk and materiality are interrelated and must be considered together by the
auditor. Which of the following is true?
A. Material fraud but not material errors cause financial statements to be materially misstated.
B. Misstatements are not important individually but are important in the aggregate, the concept of
materiality does not apply.
C. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the
financial statements are fairly stated.
D. The phrase in auditor’s standard report “present fairly, in all materials respects, in conformity
with generally accepted accounting principles” indicates the auditor’s belief that the financial
statements taken as a whole are not materially misstated.

22. To which of the following matters would materiality limits not apply in obtaining written management
representations?
A. Reductions of obsolete inventory to net realizable value.
B. The disclosure of compensating balance arrangements involving related parties.
C. Losses from purchase commitments at prices in excess of market value.
D. The availability of minutes of stockholders’ and directors’ meetings.

23. Which of the following concepts is most useful in assessing the scope of an auditor's program
relating to various accounts?
A. Attribute sampling.
B. Materiality.
C. The reliability of information.
D. Management fraud.
24. Which of the following factors are normally considered by the auditor in determining the appropriate
benchmark for the purpose of calculating overall materiality?
I. Components of the entity’s financial statements.
II. Laws and regulations.
III. Nature of the entity.
A. I and II only.
B. I and III only.
C.II and III only.
D. I, II, and III.

25. An auditor considers internal control in order to

A. Determine whether assets are safeguarded.
B. Suggest improvements in internal control.
C. Plan the audit procedures.
D. Express an opinion.

26. Holding other planning considerations equal, a decrease in the amount of misstatement in a class
of transactions that an auditor could tolerate most likely would cause the auditor to
A. Apply the planned substantive tests prior to the balance sheet date.
B. Perform the planned auditing procedures closer to the balance sheet date.
C. Increase the assessed level of control risk for relevant financial statement assertions.
D. Decrease the extent of auditing procedures to be applied to the class of transactions.

27. If an auditor is obtaining an understanding of an entity’s information and communication component

of internal control, which of the following factors should the auditor assess?
A. The integrity and ethical values of top management.
B. The philosophy and operating style of management to promote effective internal control over financial
reporting.
C. The classes of transactions in the entity’s operations that are significant to the entity’s
financial statements.
D. The oversight responsibility over financial reporting and internal control by the board or audit
committee.

28. The primary objective of procedures performed to obtain an understanding of the internal control
system us to provide the auditor with
A. Evidential matter to use in reducing detection risk.
B. Knowledge necessary to plan the audit.
C. A basis from which to modify tests of controls.
D. Information necessary to prepare flowcharts.

29. During the planning stage when the auditor is examining the contracts of client, the primary attention
should focus on
A. Large peso value items.
B. Any aspect of the agreement affecting financial disclosure.
C. Tracing the information to verify correct journal entries.
D. The discovery of related party transactions.

30. If internal control is well-designed, two tasks that should be performed by different persons are
A. Approval of bad debt write-offs and reconciliation of the accounts payable subsidiary ledger and
controlling account.
B. Distribution of payroll checks and approval of sales returns for credit.
C. Posting of amounts from both the cash receipts journal and cash payments journal to the general
ledger.
D. Recording of cash receipts and preparation of bank reconciliation.

31. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely
associated with which of the following?
A. Separation of duties
B. Flowchart accuracy
C. Understanding the system
D. Tests of controls
32. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unmodified opinion has been issued is the
A. Inherent risk
B. Acceptable audit risk
C. Control risk.
D. Detection risk.

33. All of the following pertain to an audit procedure designed to detect material misstatements at the
assertion level, except
A. Tests of controls.
B. Substantive procedures.
C. Tests of details.
D. Substantive analytical procedures.

34. An auditor should consider two key issues when obtaining an understanding of a client’s internal
controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and the implementation of the controls.
D. The implementation and efficiency of the controls.

35. Authorizations can be either general or specific. Which of the following is not an example of a
general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager's authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.

36. The frequency of the comparison of recorded accountability with assets (for the purpose of
safeguarding assets) should be determined by
A. The amount of assets independent of the cost of the comparison.
B. The nature and amount of the asset and the cost of making the comparison.
C. The cost of the comparison and whether the susceptibility to loss results from errors or fraud.
D. The auditor in consultation with client management.

37. The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does
not exist in an account balance when, in fact, such misstatement does exist is referred to as
A. Audit risk.
B. Control risk.
C. Inherent risk.
D. Detection risk.

38. Which of the following is a definition of control risk?

A. The risk that a material misstatement will not be presented or detected on a timely basis by
the client’s internal controls.
B. The risk that the auditor will not detect a material misstatement.
C. The risk that the auditor’s assessment of internal control will be at less than the maximum level.
D. The susceptibility of material misstatement assuming there are no related internal control policies or
procedures.

39. Which of the following is least likely to be considered when assessing inherent risk?
A. Non-routine transactions.
B. Estimation transactions.
C. Susceptibility to theft.
D. Expected effectiveness of controls.

40. Observation
A. Consists of looking at a process or procedure being performed by others.
B. Consists of seeking information of knowledgeable persons, both financial and nonfinancial,
throughout the entity or outside the entity.
C. Is the auditor’s independent execution of procedures or controls that were originally performed as
part of the entity’s internal control.
D. Is the process of obtaining a representation of information or of an existing condition directly from a
third party.
ACP314 (388)
AUDITING THEORY (3RD EXAM)
Instructions: Read the questions carefully. Select the answer of your choice.

1. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.

2. The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide
the auditor with
a. The probable outcome of asserted claims and pending or threatened litigation.
b. Corroboration of the information furnished by management about litigation, claims, and
assessments.
c. The attorneys' opinions of the client's historical experiences in recent similar litigation.
d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet
date.

3. Which of the following is an audit procedure that an auditor most likely would perform concerning
litigation, claims, and assessments?
a. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and
assessments indicate a going concern problem.
b. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and
assessments to which the lawyer has devoted substantive attention.
c. Discuss with management its policies and procedures adopted for evaluating and accounting
for litigation, claims, and assessments.
d. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been
recorded or disclosed in the financial statements.

4. Which one of the following types of procedures will aid the auditor in obtaining evidence regarding
the mathematical accuracy of accounting records and other information?
a. Confirmation
b. Inspection Inquiry
c. Inquiry
d. Recalculation

5. Most of the independent auditor's work in formulating an opinion on financial statements consists of
a. Considering internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets.

6. The financial statement assertion categorized as valuation means

a. An item is disclosed, classified, and described in accordance with the applicable financial reporting
framework.
b. There are no unrecorded assets, liabilities, transactions or events, or undisclosed items.
c. An used or liability is recorded at an appropriate carrying value.
d. A transaction or event is recorded at the proper amount and revenue or expense is allocated to the
proper period.

7. Confirmation consists of
a. Looking at a process or procedure during performed by others.
b. Seeking information of knowledgeable persons inside our outside the entity.
c. The response to an inquiry to corroborate information contained in the accounting records.
d. Examining records, documents, or tangible assets

8. Most audit work in a financial statement audit consists of obtaining and evaluating evidence about
what?
a. Material Errors
b. Assertions
c. Fraud
d. Internal controls
9. The most reliable forms of documentary evidence are those documents that are
a. Prenumbered
b. Internally generated
c. Easily duplicated
d. Authorized by a responsible official

10. Which of the following statements concerning the auditor's use of assertions is correct?
a. The auditor may combine the assertions about transactions and events with the assertions
about account balances.
b. In every audit engagement, the auditor should use the assertions as described in PSA 500, i.e., the
assertions should always fall into three categories: assertions about classes of transactions and events,
account balances, and presentation and disclosures.
c. There should always be a separate assertion related to cutoff of transactions and events.
d. The completeness assertion deals only with whether all transactions and events that should have
been recorded have been recorded.

11. Which statement is incorrect regarding the audit evidence relevance and assertion?
a. A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but
not to others.
b. The auditor often obtains audit evidence from different sources or of a different nature that is relevant
to the same assertion.
c. Obtaining audit evidence relating to a particular assertion can be a substitute for obtaining
audit evidence regarding another assertion.
d. None of the above

12. Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between auditor and vendors.
c. Copies of sales invoices inspected by the auditor.
d. Computations made by the auditor.

13.Which of the following best described the primary purpose of audit procedures?
a. To detect errors or irregularities
b. To comply with generally accepted accounting principles.
c. To gather corroborative evidence.
d. To verify the accuracy of account balances.

14. Which of the following statements relating to the completeness of evidential matter is always is true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more relevant than
data developed under unsatisfactory conditions.
c. Oral representations made by management are no valid.
d. Evidence gathered by auditors must be both valid and relevant to be considered competent.

15. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover significant subsequent events.
c. May be either tests of transactions, direct tests of financial balances, or analytical tests.
d. Will increase proportionately with the auditor's assessment of control risk.

16. Audit evidence takes different forms and varies in persuasiveness. Which of the following is the
least persuasive type of evidence?
A. Computation made by the auditor
b. Bank statement obtained from the client
c. Vendor's invoice
d. Canceled checks

17. The following statements were made in a discussion of audit evidence by two independent auditors.
Which statement is false?
a. "I am seldom convinced beyond all doubt about all aspects of the financial statements being audited."
b. "I would not undertake that procedure because at best the results would only be persuasive
and I'm looking for convincing evidence."
c. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."
d. "I evaluate the usefulness of the evidence I can obtain against the cost to obtain it."

18. The third standard of field work states that sufficient competent evidential matter is to be obtained
through inspection, observation, inquiries, and confirmation to afford a reasonable basis for an opinion
regarding the financial statements under audit. The substantive evidential matter required by this
standard may be obtained, in part, through
a. Flowcharting the internal control structure.
b. Proper planning of the audit engagement.
c. Analytical procedures
d. Auditor working paper

19. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.

20. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should
a. Seek direct communication with the entity's lawyers.
b. Disclose the litigation and claims in the auditor's report.
c. Issue unqualified opinion with explanatory paragraph.
d. Issue qualified or adverse opinion.

21. Which of the following actions should an auditor, who discovers a misstatement in a sample of items
taken from a population, not take?
a. Increase the sample size to obtain additional evidence.
b. Discard the sample and replace it with a new sample.
c. Project the sample error to the population as a whole.
d. Consider issuing a qualified opinion.

22. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical inventory
counting unless impracticable. Where attendance is impracticable, due to factors such as the nature
and location of the inventory, the auditor should
a. Take or observe some physical counts on an alternative date and, when necessary perform tests of
intervening transactions.
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that the auditor need not make reference to a scope
limitation.
c. Issue qualified or disclaimer of opinion.
d. Issue qualified or adverse opinion.

23. Which statement is incorrect regarding valuation and disclose of long-term investments?
a. When long-term investments are material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding their valuation and disclosure.
b. Audit procedures regarding long-term investments ordinarily include considering evidence as to
whether the entity has the ability to continue to hold the investments on a long-term basis.
c. If market quotations exceed the carrying amounts, the auditor would consider whether a write-
down is required.
d. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor would
consider whether appropriate adjustments and/or disclosures have been made.
24. PSA 501 states that in planning attendance at the physical inventory count, the auditor considers
the risks of material misstatement related to inventory as well as the nature of the internal control related
to inventory. Which of the following items should the auditor also consider?
I. Whether adequate procedures are expected to be established and proper instructions issued for the
physical inventory count.
II. The timing of the count.
III. The locations at which inventories are held.
IV. Whether an expert's assistance is to be sought.
a. i and iv only
b. ii and iii only
c. ii, iii, and iv only
d. I, ii, iii, and iv

25. Which statement is incorrect regarding segment information?

a. Segment information is information in the financial statements regarding distinguishable components
or industry and geographical aspects of an entity.
b. When segment information is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its disclosure in accordance with generally accepted accounting
principles in the Philippines.
c. The auditor considers segment information in relation to the financial statements taken as a
whole, and is ordinarily required to apply auditing procedures that would be necessary to
express an opinion on the segment information standing alone.
d. Audit procedures regarding segment information ordinarily consist of analytical procedures and other
audit tests appropriate in the circumstances.

26. Which of the following statements concerning the auditor's attendance at the physical inventory
count is incorrect?
a. A financial statement audit should always include attendance at the physical inventory count.
b. If the auditor is unable to attend the physical inventory count on the date planned due to unforeseen
circumstances, he/she should take or observe some physical counts on an alternative date and, when
necessary, perform audit procedures on intervening transactions.
c. Where attendance is impracticable, due to factors such as the nature and location of the inventory,
the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence
of existence and condition to conclude that reference to a scope limitation need not be made.
d. Inventories that are under the custody and control of third parties (for example, inventories located
public warehouses) may be verified by obtaining direct confirmation from the custodians, provided
depending on the materiality of the amount involved, additional procedures should be applied as
deemed necessary.

27. Which of the following statements concerning fraud is incorrect?

a. Fraud generally involves incentive or pressure to commit fraud, a perceived opportunity to do so, and
some rationalization of the act.
b. Two types of misstatements relevant to the auditor include material misstatements arising from
fraudulent financial reporting and material misstatements arising from misappropriation of assets.
c. Fraud involves actions of management but excludes the actions of employees or third parties.
d. An audit rarely involves authentication of documentation; thus, fraud may go undetected by the
auditor.

28. The auditor's responsibility regarding detection of fraud is best indicated by this statement.
a. The auditor is responsible for the failure to detect fraud only when an adverse opinion is issued on
the financial statements.
b. The auditor is responsible for the failure to detect fraud only when such failure clearly results
from deviations from audit procedures specifically described in the engagement letter.
c. The auditor must extend auditing procedures to actively search for signs or evidence of fraud in all
situations.
d. The auditor must extend auditing procedures to actively search for evidence of fraud where the
examination indicates that fraud may exist.
29. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if
a. Statistical sampling techniques were not used on the audit engagement.
b. The auditor planned the work in a hasty and inefficient manner.
c. Accountants performing parts of the work failed to discover a close relationship between the treasurer
and the cashier.
d. The fraud was perpetrated by one client employee, who circumvented the existing internal control.

30. Which of the following is correct?

a. It is usually easier for the auditor to uncover fraud than errors.
b. It is usually easier for the auditor to uncover errors than errors.
c. It is usually equally difficult for the auditor to uncover errors or irregularities.
d. None of the given statements is correct.

31. Which of the following statement/s is/are correct?

I. The auditor is required to perform audit procedures regarding the entity's compliance with laws and
regulations in all cases.
II. The auditor is required to perform audit procedures regarding the entity's compliance with laws and
regulations if there is an identified non-compliance.
III. The auditor is required to perform audit procedures regarding the entity's compliance with laws and
regulations if there is a suspected non-compliance.
a. All of the above
b. I and II only
c. I and III only
d. II and III only

32. Which of the following statement/s is/are correct?

I. If the auditor concludes that the non-compliance has a material effect on the financial statements,
and has not been accurately reflected in the financial statements, the auditor shall express an
unqualified opinion.
II. If the auditor is precluded by management or those charged with governance from obtaining sufficient
appropriate audit evidence to evaluate whether non-compliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor shall express a qualified or disclaim his
opinion.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

33. Which of the following statements concerning materiality thresholds is correct?

a. Aggregate materiality thresholds are a function of the auditor's preliminary judgment concerning the
risk of overreliance.
b. In general, the more misstatements the auditor expects, the higher should be the aggregate
materiality thresholds.
c. The smallest aggregate level of errors or fraud that could be considered material to any of the
financial statements is referred to as a "materiality threshold."
d. These thresholds may change between the planning and review stages of the audit. These changes
may be indicative of an auditor's failure to observe the standards.

34. Having set the level of materiality for the financial statements as a whole, the auditor now turns his
attention to determining performance materiality. Which of the following statements about performance
materiality is NOT true?
a. Performance materiality is used to reduce the risk that the aggregate of uncorrected or undetected
misstatements exceeds materiality for the financial statements as a whole to an acceptable level.
b. Performance materiality refers to the amounts set by the auditor at higher than the materiality
level for particular classes of transactions, account balances or disclosures where the
materiality level might otherwise mean that such items are not tested.
c. Once the materiality for the financial statements as a whole has been set, a lower level of
performance materiality is determined by the auditor using his or her professional judgment.
d. The performance materiality level is affected by the auditor's understanding of the entity and the
nature and extent of misstatements identified in prior audits.
35. When determining whether the work of internal auditors is likely to be adequate for the purposes of
the audit, the external auditor must assess whether the work of an internal auditor is done with due
professional care. Which of the following pertains to due professional care?
a. Whether the internal auditors are members of relevant professional bodies.
b. Whether activities of the internal audit function are properly planned, supervised, reviewed
and documented.
c. Whether the internal auditors are free of any conflicting responsibilities.
d. Whether the internal auditors are members of relevant professional bodies.

36. Which of the following best describes management's expert?

a. An individual or organization possessing expertise in a field other than accounting or auditing, whose
word in that field is used by the auditor in obtaining sufficient appropriate audit evidence.
b. An individual or organization possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the entity to assist the entity in preparing the
financial statements.
c. Both a and b.
d. Neither a nor b.

37. Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an
expense account, thus overstating expenses.
c. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported
as a miscellaneous operating expense.

38. Which of the following best describes what is meant by the term "fraud risk factor?"
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often have been observed in circumstances where frauds have
occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified
d during an audit.

39. Which of the following is correct concerning requirements about auditor communications about
fraud?
a. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
b. Fraud with a material effect on the financial statements should be reported directly by the auditor to
the Securities and Exchange Commission.
c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor
through use of an "emphasis of a matter" paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

40. When performing a financial statement audit, auditors are required to explicitly assess the risk of
material misstatement due to
a. Errors.
b. Fraud.
c. Illegal acts
d. Business risk